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Schlumberger Is Keeping Up With the Smiths

Schlumberger will fork over a healthy $11 billion of its stock to buy Smith International.

In previous articles for my Foolish friends, I've referred to oilfield services giant Schlumberger(NYSE:SLB) as an 800-pound gorilla. It now appears that the company is about to add some weight.

The added poundage will likely come from a purchase of Smith International(NYSE:SII), a Houston-based company that specializes in drill bits, drilling fluid, and other equipment for oil and gas companies. Under the terms of the merger, Smith shareholders will obtain 0.6966 of a Schlumberger share for each Smith share they own. On that basis, Schlumberger will be paying roughly $11 billion -- all in stock -- a healthy 37.5% premium over Smith's closing share price on Thursday.

As is the case with most of the larger services companies these days, much of the companies' business comes from overseas, where they frequently work with large state-owned oil companies that prefer service companies that are able to provide them with a full package of assistance. Indeed, a desire for a greater breadth of services was largely the reason that Baker Hughes(NYSE:BHI)agreed last summer to spend $5.5 billion to buy BJ Services(NYSE:BJS). This phenomenon could eventually lead to the likes of Halliburton(NYSE:HAL) and Weatherford(NYSE:WFT) hitting the acquisition trail.

While the product and service overlap between Schlumberger and Smith is minimal, outside of directional drilling and well logging, most observers anticipate a thorough antitrust examination. In addition, it appears possible that Schlumberger could end up jettisoning Smith's Wilson distribution business, because it doesn't fit the structure of the rest of the combined company.

This won't be the first time the two companies have joined forces. Smith owns 60% of M-I Swaco, the leading supplier of drilling fluids engineering systems. Swaco was responsible for essentially half of Smith's revenues last year. The other 40% of the venture is owned by Schlumberger.

So we'll await the closure of the biggest U.S. merger this year. In the meantime, I strongly suggest that Foolish investors with a taste for energy keep a close eye on Schlumberger.